How much should we charge for an IT job?


14

The scenario

We just got our very first medium/large size client.

They are opening a new company which operates around a web application that will be entirely developed and maintained by us.

We have been asked to create a partnership proposal, that if accepted will end in a contract signed by both companies.

The client wants us to dedicate X amount of work hours, per month, to their software.

They also want us to provide an “emergency” support in case something urgent happens on a weekend, holyday or evening.

During these hours we will be providing the following services: full development of the application, application planning and architecture, layout design, usability tests, support to eventual bugs and issues, maintenance and data backup, regular training to the client full-time employees, web marketing, website development and maintenance, graphic design, search engine optimization.

Our current relation

We have already made some works for them (including the very basic, release version of the application).

In fact, they want us to do many more works for the other companies (we have already done some small ones), which can also result in more “contracts”.

The client

We actually don’t know how big these guys are, because instead of a big company they own at least 4 small and one medium company… that we know of… but there are high chances that they do own some more small companies.

Our company

Our very small startup is just a couple of months old, and is focused on web development, marketing and IT solutions.

We are based in the south of the Portugal (the minimum wage here is 475€ )

We already have some years of experience in the field, mainly developing medium to large web applications for big companies (when we were their employees).

The questions

How much do you think we should charge per hour?

What special conditions do you think we should do?

Pricing Software Contract

asked Nov 25 '10 at 03:16
Blank
Marco
173 points
Top agency to build award-winning mobile apps: Utility NYC

1 Answer


31

The short answer : You should bill each consultant out at 1/1000th (0.1%) of their annual salary.

First of all, congratulations on doing this as an hourly cost with a fixed number of hours. That makes your life infinitely better than if you had to do it for a fixed price and were spending the rest of your life arguing over what's INCLUDED in the fixed price!

Back to your question...

For consulting jobs like this, you usually see a range of different hourly prices.

At the LOW end of the range, you have individual, independent consultants. They usually charge 1/1000th of an annual salary. Why?

  1. There are about 2000 hours in a normal working year. (52 weeks - 2 weeks vacation * 40 hours a week). Very rough estimate.
  2. However, as an independent consultant, you supply your own equipment, you pay for your own benefits, vacation, sick days, health insurance, regular insurance, and employment taxes (depending on country, of course).
  3. Also, an independent consultant must spend a lot of time finding clients.
  4. And the client has a lot more flexibility with independent consultants compared to full time employees, ESPECIALLY in Europe where firing full time employees can be a challenge

So all this adds up to = the right rate for an independent consultant is 1/1000th of the annual salary that person would be getting for the same job.

That is the LOW END price for hourly work like this.

The HIGH END is what large, prestigious consulting firms might charge: Microsoft Consulting, IBM, the big accounting firms, etc. That will be as much as four times higher, i.e. 1/250th of an annual salary. What's the logic of this? Well, nothing really:

  1. They have to pay for a lot of fancy glass and steel skyscrapers in every city, filled with secretaries, assistant mail delivery boys, marketing, public relations, etc.
  2. They have to pay for partners, who need to take home at least $1,000,000 a year in exchange for playing golf with two or three clients every month.
  3. They can get away with it, because the stupider companies are too scared to hire small firms.

Where are you on the scale from 1/1000th of a salary to 1/250th of a salary? I would argue that as a new company, you're a lot closer to the 1/1000th position... you're not THAT different than an independent consultant. So that's where I would start. Once you have more experience, more clients, and more demand for your services, you can gradually try to raise prices... for example, a good rule of thumb is, if you find that you have more than 3 months of bookings already made, you should probably start raising your rates until people start turning you down.

answered Nov 25 '10 at 07:17
Blank
Joel Spolsky
13,472 points
  • Wow!! Joel! That was a great... great... GREAT response!!! Really!! Thank you so much for your time. :D By the way, is there any "special conditions" that companies usually do in this cases? – Marco 8 years ago
  • Great answer. I would increase the fee if they want you on-call for emergencies. This can hinder assigning people to different clients. – Jeff O 8 years ago
  • one of the best and most concise descriptions of how consulting pricing works that I ever saw! 2 thumbs up! I can only add that we find some success doing tiered pricing, that is if client buys over N number of hours a month they get lower rate. And as Jeff noted there is an extra fee for emergencies. – Alex 8 years ago
  • That works surprisingly well. Thanks! – Big Tuna 8 years ago

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